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Family General Partnership

Family partnerships are often used as a method of dividing business income with children in lower tax brackets and shifting future appreciation out of one's estate.

The rules set forth in IRC Sec. 704(e) deal with partnerships where capital is a material income-producing factor, as opposed to businesses which earn income by providing services.

Family members can either purchase an interest in the business or receive it by gift. If the value exceeds the annual gift tax exclusion amount' ($10,000), there may be gift taxes due. The donor parent may use his or her unified credit to eliminate or reduce gift taxes on amounts exceeding the annual exclusion.

A trust for minors can be a partner if the trust is administered solely for the beneficiaries' best interests. Treas. Reg. Sec. 1.704-1(e)(2)(vii)

Why Consider A Family Partnership?

What is the effect of shifting estate growth to a younger generation? Assume a sole proprietorship currently valued at $200,000 which has a growth potential

Family Partnerships Are Not For Everyone

Before proceeding with a family partnership arrangement, business owners must ask if they really want to have a child involved in their business. What effect will the reduced income have on their lifestyle? Will there be a gift tax due and payable when the transfer is made? Will the tax savings compensate for the increased complexity?

1 The annual exclusion amount is indexed for inflation after 1998.